COVID-19: Navigating the microbe and pollution policy exclusions
Industry experts analyze the applicability of microbe and pollution exclusions in the wake of the COVID-19 pandemic.
As corporate policyholders continue to submit claims to their insurers for business interruption and related losses sustained from the COVID-19 pandemic, insurers appear to be denying such claims routinely where the policies at issue contain exclusionary language specific to viruses — whether in stand-alone virus exclusions or other types of exclusions.
As an initial matter, the mere inclusion of the word “virus” in any policy exclusion does not mean that the exclusion applies to COVID-19-related losses. Both the specific wording of the exclusion and context are critical. This article does not address virus-specific exclusions, but a more detailed discussion of such exclusions can be found here.
But even when the policies at issue do not contain virus-specific exclusions, insurers have looked to other exclusions — including microbe exclusions and pollution exclusions — as bases for denial. This article addresses microbe and pollution exclusions commonly found in commercial property policies and explores several arguments that policyholders may employ to overcome these denials.
Importantly, the specific wording of these exclusions varies, sometimes significantly, from policy to policy, and even seemingly minor wording differences may have a meaningful impact on the policyholder’s best arguments for overcoming their insurers’ denials. Although we discuss actual exclusionary language excerpted from common policy forms, it is merely illustrative. Careful attention to the specific language of individual policies is required to formulate the policyholder’s most effective arguments for coverage.
The microbe exclusion
Microbe exclusions typically purport to preclude coverage for loss or damage caused by the presence of microbes or by a governmental order directing a policyholder to remove microbes from its premises.
For example, one common form of microbe exclusion provides that “this Policy excludes loss or damage directly or indirectly caused by or resulting from[…]:”
Fungi, wet rot, dry rot and microbes,
(1) The presence, growth, proliferation, spread or any activity of Fungi, wet rot, dry rot or Microbes, all whether direct or indirect, proximate or remote or in whole or in part caused by, contributed to or aggravated by any physical damage insured by this policy;
(2) Any government or regulatory directive or request that the Insured or anyone acting under the Insured’s direction or control test for, monitor, clean up, remove, contain, treat, detoxify or neutralize any Fungi, wet rot, dry rot or Microbes.
“Microbe” is thereafter defined as: “[a]ny non-fungal microorganism or non-fungal, colony-form organism that causes infection or disease. Microbe includes any spores, mycotoxins, odors, or any other substances, products or byproducts produced by, released by, or arising out of the current or past presence of microbes.”
Other policies utilize similar language in purporting to exclude coverage for “Fungi.” For example:
This insurance does not apply to loss or damage:
which is fungus;
which is in anyway attributed to the presence of fungus; or
caused by or resulting from fungus.
“Fungus” is thereafter defined as any “mildew, mold or other fungi;” “other microorganisms;” or “any mycotoxins, spores, or other by-products of the foregoing” or any “colony or group of any of the foregoing.”
Although insurers have relied on these and similar exclusions to deny coverage for COVID-19-related losses, we believe that the language of these exclusions does not support such denials because COVID-19 is a virus, and the definitions of “microbe” and “fungus” do not make any specific references to “viruses.”
While insurance law varies from state to state, fundamental principles of insurance policy interpretation require that language in policy exclusions be construed narrowly and that any limitations to coverage be expressed clearly. Additionally, where an exclusion is ambiguous, a court must adopt the interpretation that favors the policyholder. If insurers intended microbe and/or fungus exclusions to include viruses, they had an obligation to expressly identify viruses among the specific agents being excluded.
Illustrative of this concept, many insurers have specifically included viruses in their microbe exclusions. These exclusions demonstrate that the insurance industry contemplated including viruses like COVID-19 within the scope of microbe exclusions, and in some cases, made a knowing decision not to include them. Their decision to include viruses in some microbe and fungi exclusions but not others demonstrates clearly that they intended to include viruses in the scope of the exclusions only when they were expressly identified in the exclusions.
Likewise, viruses are not encompassed within other terms commonly incorporated in definitions of “Microbe” and “Fungi,” such as “microorganism.” By definition, “microorganisms” are “living” beings. Most virologists, however, consider viruses to be “non-living.” In particular, viruses do not embody the traits of living organisms because they do not respond to changes in the environment and cannot reproduce on their own (i.e., they can only replicate themselves by infecting a host cell).
The pollution exclusion
Exclusions for “pollutants” or “contaminants” (referred to collectively here as “pollution exclusions”) also are common in commercial property policies, and also have been relied on by certain insurers in denying coverage. Pollution exclusions often utilize language akin to:
. . . this Policy excludes loss or damage directly or indirectly caused by or resulting from any of the following . . . :
The release, discharge, or dispersal of toxic or hazardous substances, contaminants or pollutants, all whether direct or indirect, proximate or remote or in whole or in part caused by, contributed to or aggravated by any physical loss or damage covered by this policy; unless the contamination is itself caused by covered physical loss or damage of property insured by this Policy for the following Causes of Loss;
Fire; lightning; explosion; wind or hail; smoke; direct impact of vehicle, aircraft or vessel; strike, riot or civil commotion; vandalism or malicious mischief; Equipment Breakdown; leakage or accidental discharge of fire protection equipment; collapse; falling objects; weight of snow, ice or sleet; theft; sudden and accidental discharge, leakage, backup, or overflow of liquids or molten material from confinement within piping, plumbing systems, tanks, equipment or other containment located at the insured location.
Policies containing pollution exclusions typically define “contaminants” and/or “pollutants.” Although there are often important variations in these definitions, they tend to include: “[a]ny solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, fumes, acids, alkalis, chemicals, and waste.”
Much like the microbe and fungi exclusions discussed above, the definition of “pollutant” in this definition does not include viruses. Again, this omission suggests that the insurers did not intend for the exclusion to encompass viruses.
Moreover, many jurisdictions have held that similar pollution exclusions, often in other types of insurance policies, apply only to traditional, industrial-type pollutants or contaminants. Many of these courts have found that the drafting history of the exclusion reveals an intent on the part of the insurance industry to so limit its application. Accordingly, these courts have declined to apply pollution exclusions to naturally-occurring substances such as carbon monoxide, manure, and sand, dirt/dust, or silica.
Finally, courts consistently construe insurance policies “to give a reasonable meaning to each provision” of the policy and to “avoid a construction which renders portions of a contract meaningless, inexplicable or mere surplusage.”Thus, where a policy contains both a pollution exclusion and a microbe exclusion, there is a strong argument that the pollution exclusion was not intended to include substances like bacteria and viruses because there would have been no need to include the microbe exclusion if the pollution exclusion was intended to apply to naturally-occurring, disease-causing agents. Therefore, to interpret the pollution exclusion to encompass viruses would render the microbe exclusion duplicative and, therefore, meaningless.
Conclusion
Many policyholders will have compelling arguments for avoiding application of microbe and pollution exclusions in their property policies to their COVID-19-related losses. However, the best arguments to pursue often will turn on specific nuances in policy language and legal authority from other contexts. When in doubt, policyholders should consult with experienced, policyholder-side coverage counsel.
Adrian Azer is a partner with the Haynes and Boone Insurance Recovery Practice Group in Washington, D.C. He exclusively represents corporate policyholders in a variety of complex insurance coverage matters. You can reach him at Adrian.Azer@HaynesBoone.com.
Stephen Raptis is a partner with the Haynes and Boone Insurance Recovery Practice Group in Washington, D.C. He handles complex insurance claims on behalf of commercial policyholders and advises clients on coverage issues arising under all types of commercial insurance policies. You can reach him at Stephen.Raptis@HaynesBoone.com.
Brittany Parks is an associate with the Haynes and Boone Litigation Practice Group in Palo Alto. You can reach her at Brittany.Parks@HaynesBoone.com.
This article was originally published on the Haynes and Boone website. Reprinted with permission.
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